The Jobs and Growth Tax Relief Reconciliation Act of 2003


AccountingWEB's

Summary of the New Tax Legislation

The Jobs and Growth Tax Relief

Reconciliation Act of 2003

On May 28, 2003, President Bush signed the Jobs and Growth Tax Relief Reconciliation Act
of 2003 (JGTRRA), the third largest tax cut in U.S. history.

The new law contains a variety of tax cuts and changes to the tax laws that will affect both
individual and business taxpayers. Many of the changes are temporary,
lasting only a few years, and will require yet another act of Congress
to make them a permanent part of the tax law.

The tax act contains changes to many visible aspects of the tax law including an increase in
the Child Tax Credit, a reduction in the tax rates on capital gains and
dividends, increases in the maximum amount of depreciation that can be
deducted, partial elimination of the "marriage penalty," and a
reduction in the marginal income tax rates. Several of these changes are
retroactive to January 1, 2003.

New tax withholding tables and a summer rebate program will spearhead the changes to the tax
laws, helping to publicize the new features and providing tangible
evidence to millions of taxpayers that their tax rates have been
reduced.

THE TOP 10 ESSENTIALS

  1. Acceleration of Reductions in the Marginal Tax


    The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
    provided for a reduction in marginal tax rates that were scheduled
    to phase in over the range of years from 2001 through 2006. The 2003
    tax act accelerates that timetable so that the rates that would have
    been effective in 2006 are now effective in 2003. These new tax
    rates are retroactive to January 1, 2003 and will be reflected in
    changed withholding tables that are available now and are to be implemented no later than July 1, 2003.

  2. Acceleration of the Expansion of the 10% Tax Bracket

    In 2001 the 10% tax bracket was created to tax the lowest level of
    income at a new low income tax rate. For single and married filing
    separately taxpayers, the first $6,000 of taxable income was to be
    taxed at 10% instead of the previous rate of 15%. For married filing
    jointly and surviving spouse taxpayers, the first $12,000 was to be
    taxed at 10%. It was this new 10% tax bracket that provided an
    opportunity for the tax rebate that occurred in the summer of 2001.
    The EGTRRA called for the 10% tax bracket to expand to $7,000 and
    $14,000 for the respective filing statuses effective in 2008. The
    new tax act accelerates the expansion amounts to $7,000 and $14,000
    in 2003 instead of waiting until 2008.

  3. Partial Elimination of the Marriage Penalty

    Provisions in the EGTRRA in 2001 set in motion the elimination of
    the marriage penalty by increasing the 15% tax bracket and the
    standard deduction for married filing jointly taxpayers. These
    provisions were to begin in 2005 and phase in completely by 2009.
    The new law calls for the complete elimination of the marriage
    penalty for tax years 2003 and 2004, after which the 2005-2009
    phase-in is to begin as previously scheduled.

  4. Increase in the Child Tax Credit

    A rebate program is scheduled for summer 2003 that will provide
    approximately 25 million taxpayers with early access to the
    additional $400 per child credit. The Child Tax Credit previously
    provided a credit against income taxes of $600 for each dependent
    child who is under age 17 by December 31 of the tax year. The JGTRRA
    increases this credit amount to $1,000 per qualifying dependent
    child. Approximately 25 million taxpayers will receive a rebate
    check this summer if, based on information in their 2002 income tax
    return, it appears that they will qualify for the Child Tax Credit
    for 2003.

  5. Decrease in the Tax Rate on Long-Term Capital Gains

    In recent years, long-term capital gains have been taxed at a
    maximum rate of 20%. Gains on assets owned for more than five years
    attracted a lower rate of 18%. These rates were even lower (10% and
    8%) for taxpayers in the lowest tax brackets. The JGTRRA lowers the
    maximum tax rates on long-term capital gains to 15% and 5% and does
    away with the 18% and 8% rates altogether.

  6. Decrease in the Tax Rate on Dividend Income to Match the Capital Gain Tax Rate

    One of the high-profile debates surrounding this tax law relates to
    the taxation of dividend income, which has been subject to income
    tax at both the corporate and individual level. Corporations pay
    income tax on their income, then the income is passed to
    shareholders in the form of dividends, and the shareholders pay
    income tax on the same money, as "ordinary income" taxed
    at a regular income tax rate. The new law reduces the individual
    income tax rate on dividend income to a maximum of 15%, and 5% for
    taxpayers in the lower tax brackets.

  7. Changes to the Rules for Alternative Minimum Tax

    The new tax act increases the amount of income that is exempted from
    Alternative Minimum Tax (AMT), thus allowing more taxpayers to pay
    tax at the regular income tax rates instead of the higher minimum
    tax rates. The changes to the AMT exemptions will be in place only
    for tax years 2003 and 2004.

  8. Addition of a New 50% Bonus Depreciation Available

    Last year, the Job Creation and Worker Assistance Act of 2002
    provided for a bonus depreciation deduction of 30% of the cost of
    qualified property that was acquired and placed in service after
    September 10, 2001 and before September 11, 2004. The new act
    extends the 30% bonus depreciation period to December 31, 2004 and
    also establishes as an alternative a 50% bonus depreciation
    deduction for qualified property acquired and placed in service
    between May 6, 2003 and December 31, 2005.

  9. Increase to $100,000 the Amount of Section 179 Depreciation Allowable

    Section 179 of the Internal Revenue Code provides taxpayers with an
    opportunity to treat the cost of qualifying property as a deduction
    rather than a capital expenditure. Prior law allowed taxpayers to
    take a deduction for up to $25,000 of Section 179 property in 2003.
    The new tax act allows taxpayers to deduct up to $100,000 of
    qualifying property. The $100,000 amount will be indexed for
    inflation in 2004 and 2005.

  10. Change in the Estimated Tax Requirements for Corporations

    Any corporation owing a quarterly estimated income tax payment in
    September 2003 is entitled to defer 25% of that payment until
    October 1, 2003. Similarly, the EGTRRA provided for corporations to
    defer 20% of their September 2004 payment until October 1, 2004.

DETAILS OF THE TOP 10 ISSUES

  1. Acceleration of Reductions in the Marginal Tax Rates as Originally Provided by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)

    The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
    provided for a decrease in marginal tax rates over a period of six
    years. That decrease has been accelerated so that the full amount of
    the tax rate decrease, originally slated to become effective in
    2006, is effective now, retroactively to January 1, 2003. New tax
    withholding tables are available now
    and will be mailed to all employers during June 2003. Adjustments to
    employee withholding are to be implemented as soon as possible, and
    no later than July 1, 2003.

    The new marginal tax rates are as
    follows:

    Previous 2003 rate: 10%, no change in New Rate

    Previous 2003 rate: 15%, no change in New Rate

    Previous 2003 rate: 27%, New rate: 25%

    Previous 2003 rate: 30%, New rate: 28%

    Previous 2003 rate: 35%, New rate: 33%

    Previous 2003 rate: 38.6%, New rate: 35%

    These
    rates are scheduled to remain in place until December 31, 2010. On
    January 1, 2011 the rates are scheduled to increase as follows: 10%
    rate increases to 15% 15% rate remains the same 25% rate increases
    to 28% 28% rate increases to 31% 33% rate increases to 36% 35% rate
    increases to 39.6%.


  2. Acceleration of the Expansion of the 10% Tax Bracket as Originally Provided in the EGTRRA
    The new law expands the current 10% tax bracket from the first
    $6,000 in taxable income for single taxpayers and married taxpayers
    filing separately to $7,000 in taxable income for 2003 and 2004,
    retroactive to January 1, 2003. The 10% bracket for married
    taxpayers filing jointly expands from $12,000 to $14,000 in taxable
    income for 2003 and 2004, also retroactive to January 1, 2003. The
    10% rate for head of household taxpayers on the first $10,000
    remains unchanged. The 10% bracket for all taxpayers is scheduled to
    revert back to 2002 levels ($6,000 and $12,000) for the years
    2005-2007, then change to $7,000 and $14,000 again for the years
    2008-2010. Sunset provisions in the EGTRRA return taxable income in
    the 10% bracket to a tax rate of 15% starting in 2011.


  3. Partial Elimination of the Marriage Penalty by Increasing the 15% Tax Bracket and the Standard Deduction for Married Taxpayers Filing Joint Returns, Effective for 2003 Tax Returns
    Prior to the enactment of the JGTRRA, married taxpayers who each
    earned an income paid a premium in taxes. If the same two taxpayers
    were single they would benefit from lower marginal tax rates and
    higher standard deductions on their combined income. The new tax act
    rectifies this issue for taxpayers in the lower income tax brackets
    by changing the 15% marginal tax bracket and the standard deduction
    of married taxpayers filing joint tax returns so that these amounts
    are exactly double those of single taxpayers, thus eliminating the
    marriage tax penalty for many taxpayers.

    Effective immediately and
    retroactive to January 1, 2003, the 15% tax bracket for married
    taxpayers filing joint tax returns is expanded to be exactly double
    that of individual taxpayers. This change will remain in place for
    all of 2003 and 2004. Starting in 2005 the phase-in amounts created
    by the EGTRRA will become effective.

    Thus, the 15% tax bracket for
    married taxpayers filing joint returns will equate to the following
    percentages of the 15% tax bracket for single taxpayers:

    2003

    200%

    2004

    200%

    2005

    180%

    2006

    187%

    2007

    193%

    2008

    200%

    2009


    200%

    2010

    200%

    Starting in 2011 the 15% tax bracket for married
    taxpayers filing joint tax returns is scheduled to revert to 167% of
    the single taxpayer's 15% tax bracket, as it was prior to the
    enactment of the EGTRRA.

    In addition, the standard deduction for
    married taxpayers filing joint tax returns will be double that of
    single taxpayers for 2003 and 2004. After 2004 the phase-in
    percentages from the EGTRRA will take over. Thus the standard
    deduction for married taxpayers filing joint returns will be the
    following percentages of the standard deduction for single
    taxpayers:

    2003



    200%

    2004


    200%

    2005


    174%

    2006


    184%

    2007


    187%

    2008


    190%

    2009


    200%

    2010


    200%

    Starting in 2011 the standard deduction for married taxpayers filing joint tax returns is
    scheduled to revert to 167% of the single taxpayer's standard
    deduction, as it was prior to the enactment of the EGTRRA.

  4. Immediate Increase in the Child Tax Credit from $600 to $1,000, Effective for 2003 Tax Returns

    One of the highest profile features of the new tax legislation is
    the immediate increase in the Child Tax Credit coupled with a rebate
    program scheduled for the summer of 2003. Effective for tax years
    2003 and 2004 only, the Child Tax Credit, previously scheduled to
    remain at $600 through those years, is increased to $1,000 for each
    dependent child under age 17.

    In 2005 the Child Tax Credit will
    return to the phase-in schedule set out in the EGTRRA as follows:

    Child Tax Credit amounts:

    2003

    $1,000

    2004

    $1,000

    2005

    $700

    2006

    $700

    2007

    $700

    2008

    $700

    2009

    $800

    2010

    $1,000

    Starting in 2011 the Child Tax Credit is scheduled to revert to $500 per child.

    The JGTRRA calls for an immediate rebate of $400 per
    child, representing the additional amount of Child Tax Credit due to
    taxpayers in 2003. The federal government has announced that 25
    million taxpayers will qualify for the rebate. The rebate checks are
    to be mailed as early as July 2003 and no later than October 1,
    2003. Eligible taxpayers include those whose qualifying dependents
    that appeared on 2002 income tax returns will still be under age 17
    by December 31, 2003. To be eligible to receive the rebate,
    taxpayers must have received the benefit of a Child Tax Credit on
    their 2002 tax return.

    The IRS will determine who qualifies for the
    rebate. No action is required by taxpayers to ensure that they
    receive their rebates. Eligible taxpayers who meet the criteria for
    the Child Tax Credit and who do not receive a rebate in 2003 may
    claim such credit on their 2003 income tax returns.

  5. Decrease in the Tax Rate on Long-Term Capital Gains to 15% (5% for Taxpayers in the 10% and 15% Tax Brackets)

    The income tax on long-term capital gains is reduced from 20% to 15%
    for transactions on or after May 6, 2003. Long-term capital gain
    transactions occurring in 2003 but before May 6, 2003 are subject to
    the rates previously set out in the tax laws. In conjunction with
    the reduction in the tax on long-term capital gains, the former 18%
    tax rate is eliminated.

    Long-term capital gains occurring on or after May 6, 2003, that under previous law would have been subject
    to a 10% maximum tax rate, are to be taxed at 5%. Gains that fall
    into this category are gains received by taxpayers whose ordinary
    income is taxed in tax brackets no higher than 15%.

    The new rates for taxation of capital gains are effective for tax years 2003 through
    2008. In 2009 the income tax on long-term capital gains reverts to
    the pre-May 6, 2003 rates of 20% and 10% (18% and 8% on assets held
    for more than five years).

  6. Decrease in the Tax Rate on Dividend Income to Match the Capital Gain Tax Rate

    The income tax on dividends received by individual shareholders is
    reduced to the same rate as the tax on long-term capital gains. The
    new, lower rate is effective and retroactive to January 1, 2003.

    Dividends on both common and preferred stock are eligible for the
    new tax rate. To qualify for the lower tax rate, dividends must be
    earned on stock that has been owned for at least 60 days of the
    120-day period that begins 60 days before the ex-dividend date.
    Dividends received from stock that does not meet the 60-day rule is
    subject to ordinary income tax rates.

    Dividends and capital gains earned in tax-deferred retirement funds are still subject to regular
    income tax rates when the money is withdrawn from the funds.

    While dividends from foreign stock traded on U.S. exchanges qualify for
    the decreased rate on dividend income, taxpayers should note that
    any allowable foreign tax credit on such dividend income will be
    adjusted to reflect the effects of the reduced tax rates. The new
    rates for taxation of dividend income are effective for tax years
    through 2008. In 2008, dividends that would be subject to the 5% tax
    rate will not be taxed at all. In 2009 the income tax on all
    dividends reverts to the same rates as tax on ordinary income.

  7. Changes to the Rules for Alternative Minimum Tax That Will Decrease the Number of Taxpayers Who Are Required to Pay This Tax

    The exemption amounts that provide the basis for income subject to
    alternative minimum tax are to be raised effective and retroactive
    to January 1, 2003. The revised exemption amounts for 2003 and 2004
    are as follows:

    • Married taxpayers filing joint return and surviving spouses: $58,000
    • Single taxpayers and heads of household: $40,250
    • Married taxpayers filing separate return: $29,000

    Beginning in 2005 the exemption amounts return to their 2002 levels as follows:

    • Married taxpayers filing joint return and surviving spouses: $49,000

    • Single taxpayers and heads of household: $35,750

    • Married taxpayers filing separate return: $24,500

  8. Addition of a New 50% Bonus Depreciation Available for Property Acquired After May 5, 2003 and Prior to January 1, 2005

    The JGTRRA allows businesses to deduct up to 50% of the cost of
    certain property in the year of purchase as bonus depreciation.
    Qualifying property includes property purchased and placed in use
    after May 5, 2003 and before January 1, 2005. Property for which the
    purchase was contracted prior to May 6, 2003 does not qualify for
    the 50% deduction. Property that does not qualify for the 50% bonus
    depreciation, such as property acquired or placed in service during
    2003 but prior to May 6, 2003, is still eligible for the 30% bonus
    depreciation established by the Job Creation and Worker Assistance
    Act of 2002. Property acquired between September 11, 2001 and
    December 31, 2004 is eligible for the 30% bonus depreciation.
    Previously the cut-off date was September 10, 2004. The new tax act
    also provides for an increase to $7,650 in the amount of either
    bonus depreciation or Section 179 expense that may be deducted for
    luxury automobiles that qualify for the 50% bonus depreciation.

  9. Increase to $100,000 the Amount of Section 179 Depreciation on Purchases of New Equipment Allowed as a Deduction for Small Businesses

    Small businesses are entitled to an increase to $100,000 of the
    amount of annual deduction allowed for Section 179 property for the
    years 2003 through 2005. Businesses that place more than $400,000 of
    qualified property in service in any year are subject to a phase-out
    of the $100,000 limit. For the years 2004 and 2005 the $100,000
    deduction is subject to cost-of-living increases. The $100,000
    allowable expense option reverts to $25,000 in 2006. Off-the-shelf
    computer software is added to the definition of items qualifying as
    section 179 property. Qualifying computer software is defined as
    software that is readily available for purchase by the general
    public, is the subject of a nonexclusive license, and has not been
    substantially modified. Database software is not included in the
    definition of qualifying computer software except to the extent that
    such database software is available in the public domain and is
    incidental to the operation of the otherwise qualifying software.
    Taxpayers are allowed to revoke Section 179 expensing decisions made
    on 2003, 2004, and 2005 tax returns by amending such returns. Any
    such revocations are final and may not be changed after the return
    is amended.

  10. Change in the Requirement for Corporations Owing Estimated Corporate Income Taxes During September 2003

    For any corporate estimated tax payments due
    and payable on a timely basis in September 2003, 25 percent of such
    payments are automatically extended to October 1, 2003.

SUMMARY

The Jobs and Growth Tax Relief Reconciliation Act of 2003 introduces changes to the tax law that become effective at different dates during 2003 and in years to come. Meanwhile, we are still in the process of phasing in changes from the Economic Growth and Tax Relief Reconciliation Act of 2001 and enjoying
changes that were implemented with the Job Creation and Worker
Assistance Act of 2002. Some of the changes brought about by these tax
acts overlap; others negate each other.

Tax planning opportunities abound as taxpayers try to make sense of the changes from all three tax acts. Does it make sense to change the structure of your investments in light of the new reduced tax rates on capital gains and
dividends? How will the increased exemptions for the Alternative Minimum
Tax affect taxpayers? What should businesses do to take the best
advantage of the changes to depreciation rules? These and more questions
are raised as a result of the recent changes to the law.

Make sure you contact your tax advisor to ensure that you are best positioned to take advantage of all of the recent changes to the tax rules.

Copyright © 2003 AccountingWEB, Inc. All Rights Reserved.

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